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Why U.S. Stocks Are Crushing the Competition

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Many skeptics believe that America's best days are behind it. But so far in 2013, investors seeking the best returns in the world are chanting "USA! USA!"

Gains of about 13% for the Dow Jones Industrials (DJINDICES: ^DJI  ) and similar returns for the S&P 500 (SNPINDEX: ^GSPC  ) might not seem like all that much, especially in light of some of the dramatic gains we've seen in recent years. But when you look at the performance of other markets in U.S. dollar terms, you'll find that it's the best performance in the developed and emerging world according to the Economist and its latest look at world markets as of June 26, with only the frontier market of Pakistani posting a better return of 22% for the year so far. Let's take a look at how American stocks are getting the job done.

3 kinds of turmoil
Throughout most of the world, stock markets are down in 2013. You can find several factors contributing to those declines, with different factors affecting different types of markets.

Among developed markets, Europe continues to struggle in the face of ongoing macroeconomic turmoil. Although the relatively strong markets of Germany and France have managed to eke out small gains of 1% to 3%, most of the weaker economies on the Continent have lost modest amounts, with Italy, Spain, and Greece all down between 5% and 10% on the year. Even Switzerland and the U.K., which have their own currencies, face challenges, with the U.K. having implemented relatively severe austerity packages while the Swiss have tied their own currency's value to that of the euro in order to reverse a massive increase in the franc's value. As long as the fate of the eurozone remains uncertain, stocks will face an uphill battle to move higher.

Meanwhile, falling commodities prices have hurt countries that rely on natural resources. In the developed world, Canada and Australia have lost around 10% in U.S. dollar terms, with most of the losses coming from the drop in their respective currency's value rather than from falling share prices in local-currency terms. Commodities have also weighed on emerging markets like Brazil and Russia, whose stock markets have lost 28% and 17%, respectively, in 2013 and as you'd expect, gold-rich South Africa has also suffered with a 17% loss year to date.

Finally, a general decrease in risk tolerance has hurt most of the rest of the world's markets. Slowing economic growth in China and India has caused double-digit percentage drops in their markets, and the ripple effect has pulled down other markets in Asia and along the Pacific Rim as well.

Will Japan steal the day from the USA?
The biggest major market that's even close to holding its own against the U.S. is Japan, which had climbed about 10% in dollar terms as of June 26. In fact, since the Economist took its snapshot of returns, the Nikkei (NIKKEIINDICES: ^NI225  ) has picked up steam, climbing 10% and at least temporarily surpassing the Dow's returns.

For Japan, the success or failure of its aggressive economic policies will determine whether its stock market success can continue. With dramatic devaluations in the yen, the government hopes to spur growth from its export sector, and shares of Sony (NYSE: SNE  ) and Toyota Motor (NYSE: TM  ) have responded with even greater gains than the overall market. Sony has nearly doubled in 2013 on the prospects for a better export environment, while Toyota has climbed about 50% even though U.S. automakers have been equally strong in meeting the challenge.

A buying opportunity?
Performance in domestic and international stock markets tends to be cyclical, and right now, it's America's turn to shine. Value-conscious investors might do best to take advantage of the relative cheapness of stocks from elsewhere in the world to diversify their portfolios, but for today, Independence Day is an appropriate time to celebrate the U.S. market's dominance in 2013.

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10/21/2016 4:47 PM
^DJI $18145.71 Down -16.64 -0.09%
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S&P 500 INDEX CAPS Rating: No stars
^NI225 $17184.59 Down -50.91 -0.30%
Nikkei 225 CAPS Rating: No stars
SNE $32.11 Down -0.61 -1.86%
Sony CAPS Rating: ***
TM $115.27 Down -0.87 -0.75%
Toyota Motor CAPS Rating: ***